New Greek bailout deal brings vague promise of debt relief

It seemed all too familiar. Euro zone finance ministers gathered in Brussels on Tuesday afternoon for a key eurogroup meeting on Greece.

After signs that the meeting was drawing to a close shortly after 6pm, negotiators left the room for further technical discussions.

Calls to the International Monetary Fund's Christine Lagarde, and further drafting followed. Food was ordered for the 19 euro zone ministers and a long night set in.

In the end, they emerged bleary-eyed shortly after 2am, clutching a draft deal that will unlock €10.3 billion of funds for Greece and includes a commitment to explore debt relief.

The cycle of endless meetings on Greece that blighted last summer may have been averted for now, but the Greek crisis has not gone away.

The last six months have been characterised by setbacks and delays for Greece since it entered its third international bailout last summer.

Following the agreement on an €86 billion package for Greece in August, negotiators representing the European Commission, European Central Bank and IMF returned to Athens along with – for the first time – the euro zone rescue fund, the ESM.

While the first review had been pencilled in for completion in October, talks dragged on, as creditors demanded more austerity measures from the Greek government in exchange for funds.

Last Sunday, Greek prime minister Alexis Tsipras pushed through a final set of reforms required under the first review, including VAT increases, pension changes and a commitment to progress the sale of non-performing loans in the banking sector.

This was deemed sufficient for the eurogroup to endorse the first review pending technical checks, with Greece’s creditors announcing the disbursement of €10.3 billion in funds, €7.5 billion of which will be paid in June, the remainder in instalments after the summer.

Disbursement

With an ECB repayment cliff of €2.3 billion looming in July, creditors had little choice but to endorse the disbursement if they were to avert a major liquidity crisis in the coming months.

With the British referendum on EU membership a month away, the EU was anxious to avoid a repeat of last summer’s bitter negotiations. EU officials had made it clear to Greek negotiators that discussions on the bailout would halt on May 31st.

But while the agreement may have bought both sides some time, questions remain about the substance of the deal.

In particular, the eurogroup’s commitment on debt raises as many questions as answers.

While the document drafted in the early hours of yesterday went further than many had expected – on their way into the meeting, finance ministers including Germany’s Wolfgang Schäuble had played down the possibility of progress on debt – its commitments to consider debt relief for Greece remain elusive.

While the eurogroup set out a staggered roadmap based on short, medium and long-term measures to be taken to alleviate Greece’s debt burden if necessary, the measures will kick in only after the programme finishes in 2018.

Crucially, euro zone governments will still have to sign off on any debt relief measures – a potential stumbling block, particularly in countries, including Finland and Germany, which faces a general election next year.

Evidently the decision by the eurogroup to give its firmest offer yet of debt relief to Greece was motivated by political pragmatism.

The IMF had consistently argued that debt relief was a prerequisite for its involvement in the third programme, though its acceptance that debt relief would not commence until 2018 was a concession.

With Germany and others needing the IMF on board to justify their own participation in the bailout to their electorates, the deal was the perfect EU compromise – giving the IMF just enough to justify its continued participation, while reassuring sceptical countries such as Germany that any concession on debt would be conditional on Greece reaching certain targets.

While the deal has bought all sides more time, the unresolved issues promise to resurface.

Greek bonds rallied yesterday on the back of the deal, though Barclays in a note to investors captured the feeling of many, writing that "tough discussions" between the creditors had been in effect postponed until after the summer when Europe's political climate is likely to be delicate ahead of the French and German elections.

In the meantime, Tsipras will continue to face political challenges in Athens as he defends the tough austerity measures demanded under the bailout.

With a majority of just three in parliament, the Syriza leader will be hoping that the promise of debt relief will be enough to convince his party and country that its third international bailout in five years is worth sticking to.